How do you calculate the depreciation on a car?

Question

I’m thinking of selling my new car. Here are some informations about it.

• Model: Suzuki XL7 2022
• Bought: Brand New, January 2022 (6 months of usage)
• Initial Price: ~$16600
• Mileage: 3100 miles

If I’m selling my car this month, what price is negotiable?

I’ve tried using straight line method of depreciation, assuming the estimated useful life is 5 years, then: Salvage value = 16600/5 = 3520, then the depreciation value (16600-3520)/5 = 2616

And therefore, the car is now worth $16600 - $3520 = $13984

Is this the right negotiable price?

Answer 1

Car is worth what people are willing to pay for it. While you're calculating depreciation for accounting purposes, that's not how real world supply and demand market price setting works.

The car may not sell for that amount because no-one wants to buy that particular car (after all, you're getting rid of it brand new after just half a year), or the car may sell for much more because of the current scarcity and significant disparity between the existing supply and the market demand.

There are many sources that provide information about car sales that can be useful to determine the market worth of the car, depending on where you're from (these things vary between countries, and sometimes within a country within different regions).

Answer 2

The way I quantify depreciation is to look at how age affects current prices. If one examines online car marketplaces, such as ebay, craigslist and more UK specific such as autotrader one can see how the age of a car influences the asking price. This is not perfect, as cars change with time, but it does allow one to get an objective view upon which one can make decisions.

Another way is online valuation services. In the UK Parkers Guide is famous and provides free estimates. I understand that Kelly Blue Book is similar in the states. I shall admit that I find the parkers very unreliable, I cannot comment on Kelly's. Another option I use to get a "standard candle" on car prices is WeBuyAnyCar, this gives a fairly low valuation but does at least seem to be somewhat related to the likely sale price at car auction. I do not know if there is a similar service in the US.

A straight line depreciation is very unlikely to model the real world with any accuracy. It used to be said that you lose 30% of a new cars value when you drive it off the car lot. I understand this is no longer true with shortage of new stock ATM, but to expect it to be linear is still unlikely. I cannot vouch for its accuracy, but AutoPadre produces depreciation curves. It breaks for your car, but it looks something like I would expect for an Audi A4:

Answer 3

In accounting, depreciation is a method of cost allocation over the useful life of an asset. Depreciation is not a valuation concept. Therefore, it is not appropriate in general to use depreciation to determine the fair value of a car. The straight-line depreciation method may be appropriate for depreciation purposes, but it may not produce a reasonably correct answer for valuation purposes.

As pointed out in one of the comments, naively using straight line depreciation for valuation purposes may produce unreasonable values. For example, straight line depreciation of a car over five years would result in a "value" of $0 after five years, regardless of the actual condition of the car. This is because the straight line depreciation method is based on time since purchase, rather than on actual usage.

Answer 4

The idea that a product has a single well-defined value is fundamentally flawed. The value of a product to it's owner is not the same as it's resale value can be very different.

Accountants and taxmen come up with standardised depreciation formula. The purpose of these formula is not to determine the market value of the asset. It is to account for the impact of capital purchases on a company's profit/loss.

If you want to know the market value of an item you have to look at the market. You can't calculate it from first principles, you have to look at what other sales are happening and then apply a premium or discount for the circumstances of your sale.

Buying products (not just cars) new means you are getting a product straight from a trusted supply chain. Buying used, even nearly new, raises a whole bunch of questions about the item. Has it been abused in some way? does it have some hard to pin down problem? Has it been involved in some form of crime? are the manufacturers warranties/support packages fully transferable?

You can try to answer these questions of course, but there is both a cost to answering them and an uncertainty in the quality of the answers. So in normal circumstances, used products, even nearly new ones, will trade at a significant discount over new products.

The same used product will also trade at different prices in different situations. A dealer selling retail can charge a premium over a private seller because they are convenient, will perform some level of checking on the car and it's paperwork and will provide the customer with a guarantee. At the other extreme dealers and car-buying services that will take a car off you with a minimum of hassle but they will probably pay you less than you could make in a private sale

We aren't exactly in normal times though, supply shortages are a major problem at the moment. Buying products new from official suppliers can often involve long waits, and this is bumping up the value of used products.

Answer 5

Depreciation is just an accounting concept, the value of your vehicle is what buyers are willing to pay. You'll have to browse comparable listings in your area to judge it's value.

Some things that might affect it:

• Color - unpopular car colors depreciate faster than popular ones. Even though 2 vehicles might have cost the same new, one will on average fetch a higher price in an identical condition, because the pool of buyers for an unpopular color is smaller.
• Brand - certain brands depreciate way faster, due to, perceptions of unreliability (e.g. Chrysler), expensive parts and service (e.g. BMW) or just a smaller manufacturer, with a less developed maintenance network, that is a hassle with a secondhand car (e.g. Mazda)
• Mods - Some mods, like exhaust noise tuning will drastically lower the value of the vehicle, because buyers will assume it has been driven hard for the milage, remove before selling. Conversely, stuff like a trailer hitch raises the value, since potential buyers who want that feature are willing to pay a premium to avoid extra hassle.
• The seller - young men are assumed to drive cars hard, so if you are one, consider asking your parent/older friend/female significant other act as one (just don't lie, buyers making incorrect assumptions isn't illegal)
• The photos on your listing - way too many people take terrible photos for car listings, without having made the vehicle spotless, this affects people's perceptions of how abused it's been.

Answer 6

Is this the right negotiable price?

There is no such thing as a "right negotiable price". It can be the point where you can start negotiating on your side, but don't expect to get that money.

Cars tend to lose a lot of their value (about 10-20%) at the moment they leave the car dealer which ordered it from the factory. From then on, the value decreases slowly over time.

A lot of factors are relevant here: how good are they maintained after the maintainance plan, how much of the warranty is still left, etc.